Putting resource productivity at the heart of the UK’s industrial strategy

February 3, 2017

Last week, the Government published its eagerly-awaited green paper on developing a new Industrial Strategy. The overarching aims of the strategy are to increase productivity and to spread growth across the UK.

The green paper is arranged around ten strategic pillars, one of which is to ‘develop affordable energy and clean growth’. Within this, the green paper reiterates the Government’s commitment to shift towards a lower carbon economy, but stresses that his must be done in a way which ‘minimises the cost to UK businesses, taxpayers and consumers’. This echoes very similar statements in a previous Policy Exchange report, The Customer is Always Right, which argued that previous Governments had paid insufficient attention to the rising cost of energy and climate policies, and that going forward the Government should place consumers and affordability at the heart of its energy strategy.

There is significant focus in the green paper on how to manage or reduce the cost of energy through improvements in network efficiency, and also in energy efficiency. In addition, the document makes a passing reference to improving resource efficiency more generally. It notes that ‘increasing the efficiency of material use across the whole supply chain can deliver huge cost savings and improve the productivity of UK businesses.’ It is clear that the Government has the appetite to develop this idea further, indicating that it plans to ‘explore opportunities to reduce raw material demand and waste in our energy and resource systems, and to promote well-functioning markets for secondary materials, and new disruptive business models that challenge inefficient practice.’

Following the publication of the green paper, Policy Exchange hosted a roundtable last week, which considered the opportunity to embed resource productivity thinking in the Industrial Strategy. The roundtable was held jointly with SUEZ Recycling and Recovery UK (a waste management firm) and also involved a number of manufacturers across the automotive, metals, paper, and construction sectors. This blog provides a summary of the key points from the discussion.

Opportunity to Improve Resource Productivity

Improving resource productivity represents a significant economic opportunity for businesses. Research by Accenture has shown that there is potential to unlock $4.5 trillion of global growth through improvements in resource productivity. They suggest that this can be achieved by moving from traditional ‘linear’ business models, in which resources are extracted, consumed, and disposed, to more ‘circular’ business models in which businesses reduce their dependence on natural resources, and turn waste streams into new sources of revenue. Accenture has also done sector-specific analysis, for example showing that the automotive sector could reduce its cost base by 14 percent through improvements in resource efficiency, delivering $400-600 billion of additional profit globally by 2030.

Similar analysis by Oakdene Hollins for Defra in 2011, suggested that UK firms could realise resource efficiency savings of £55 billion per year (increasing gross profits by 5%), mainly through improvements in waste management practices. The bulk of these potential savings relate to the construction sector, and manufacturing (where an estimated 45 percent of costs relate to materials).

On face value, it appears that improving resource efficiency could make an important contribution to reducing the cost base and raising the productivity of UK firms, and it is right that this should be a focus of the Industrial Strategy.

In addition to the economic benefits, there are obviously significant environmental gains to be made by improving resource and energy efficiency. The Defra study mentioned above suggested that improvements in energy and resource efficiency could yield a reduction in carbon emissions of 90 million tonnes of CO2 equivalent per year (or 13 percent of the UK’s total greenhouse gas emissions). Increasing resource productivity can also reduce our ecological footprint, water use, and our reliance on material imports (see research by WRAP).

The Industrial Strategy green paper rightly recognises that improving energy and resource efficiency could contribute not only to the Industrial Strategy and the UK’s productivity problem, but also towards meeting our carbon targets under the Climate Change Act, and making environmental improvements in line with Defra’s forthcoming 25 Year Plan for the Environment.

Why and how should Government intervene?

The question then is what Government should do about it? If the economic opportunities to improve resource productivity are so great, then it should be in the interest of companies to realise these opportunities, and improve their competitiveness. What is the rationale for Government intervention?

Participants at the Policy Exchange roundtable indicated that whilst there are significant opportunities to improve resource productivity, they are not always realised by businesses. The main barriers can often be a shortage of internal capital, coupled with risk aversion or short-termist attitudes towards investing to improve future efficiency. Improvements in resource efficiency can yield long term savings, but still often require significant up front capital investment. Business investment horizons are often very short, with firms looking for a 2-3 year payback. This severely limits the scope of possible improvements in resource efficiency. Short investment horizons are compounded by the fact that resource efficiency investments have to compete against other demands on capital (potentially on a global basis if a multinational firm). It is often difficult to make the case to invest in resource efficiency – even within a resource-intensive business. Businesses could also look to external sources of finance, such as banks. But informational failures may impede the use of external finance, for example the cost of producing ‘investment grade’ analysis of efficiency opportunities can be prohibitive.

There may be a role for Government intervention to overcome these financing challenges and unlock projects. However, interventions to promote energy and resource efficiency need to be well thought through, and evidence led. There have been some notable failures of policy in the past, due to a lack of understanding of the underlying barriers to investment in efficiency – such as the Green Deal energy efficiency scheme. Government must explore in detail the underlying barriers to business investment in resource efficiency investment before it proceeds further.

Because of the difficulties in financing resource efficiency improvements, businesses rarely make significant transformational changes in the way they use resources, and instead tend to make relatively incremental improvements. There are of course exceptions. For example, over the last few years Jaguar LandRover has developed a completely new range of lightweight aluminium car bodies, driven by a need to reduce the weight of its vehicles in order to meet fuel efficiency and carbon standards. As part of this process, Jaguar LandRover made fundamental changes to its manufacturing process, to reduce overall material consumption, and increase the recycled content of the materials used. Central to this change was the development of a new aluminium alloy which can tolerate higher levels of impurities. This means that scrap castings and offcuts, which were previously discarded, can now be recycled back into the production process, thereby creating a closed-loop system. Overall, this has resulted in a 40 percent reduction in the weight of the cars, improvements in fuel efficiency, a reduction in the amount of virgin materials consumed, and the amount of waste generated.

This example highlights an important way in which Government can encourage resource efficiency improvements – through research funding and catalysing the rollout of new innovations. The project was delivered through a public-partnership between Jaguar LandRover and Novelis, facilitated by the University of Cambridge, and part-funded by Innovate UK.

Whilst this is an excellent example, in general the Government could do more to support research and innovation into resource efficiency. In 2015/16, Innovate UK allocated just £6 million of its £547 million annual budget to research into Resource Efficiency. Government has pledged to substantially increase R&D spending – with the Autumn Statement revealing an additional £4.7 billion of additional funding by 2020/21, including a new ‘Industrial Strategy Challenge Fund’. Given the size of the opportunity outlined above, and its relevance to both the Industrial Strategy and the Emissions Reduction Plan, resource efficiency should arguably be one of the areas of focus.

Tackling these issues will require some novel thinking from Government. Waste policy, resource efficiency, and productivity have historically been led by quite separate parts of Government (across Defra, what is now BEIS, and HM Treasury). There is a risk that work continues in silos, but roundtable participants thought that the process of developing a new Industrial Strategy could bring together these various parts of Government, and create a more joined up approach.

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